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A dimension‐invariant cascade model for VIX futures
Author(s) -
Wang Zhiguang,
Dupoyet Brice
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22042
Subject(s) - futures contract , econometrics , volatility (finance) , curse of dimensionality , invariant (physics) , stochastic volatility , dimension (graph theory) , cascade , spot contract , economics , realized variance , mathematics , financial economics , statistics , chemistry , chromatography , pure mathematics , mathematical physics
We propose a new stochastic volatility model by allowing for a cascading structure of volatility components. The model, under a minor assumption, allows us to add as many components as desired with no additional parameters, effectively defeating the curse of dimensionality often encountered in traditional models. We derive a semi‐closed‐form solution to the VIX futures price, and find that our six‐factor model with only six parameters can closely fit spot VIX and VIX futures prices from 2004 to 2015 and produce out‐of‐sample pricing errors of magnitudes similar to those of in‐sample errors.